February 2017

Reduce Tax , India Taxes, Save Money in tax , Year end TAX planning

Five SMART things to do in Feb / March from TAX perspective.

Last 2 months left for financial year end.
Five SMART things to do in Feb / March from TAX perspective. (Financial Year End 2016-2017 ends in March)
1. Make sure that the 80C investments are done 1.5L for you and spouse(if applicable)
2. Check your short term Capital Gains (from Stocks/MF) – if possible plan to REDUCE GAIN by realizing losses (if any) from underperforming MF or Stocks
3. Check your Other sources of Income and make sure to pay timely Advance TAX to avoid interest cost later.
4. Do not generate income by means of selling assets (House/MF/Stocks/Bonds/etc) in Feb / March. POSTPONE it to April (next financial year)
5. Make timely declarations to your company for components like HRA/Interest/Loss from house property/80C declarations etc.
Conceptually, All the above helps INCREASE your monthly Cash Flow.
Plan to keep things SIMPLE. Simplicity is the way to BRILLIANCE….
… Kapil

October 2012

Cost of Inflation Index AY 2012-13 ~ Long term Capital Gains ~ Double Indexation

Double Indexation, FMP, Cost of Inflation Index AY 2012-13 ,To compute Long term Capital Gains Indexation, AY 2012-13, Tax Planning, Fixed Maturity Plans, Debt Funds Taxation, Real Estate Capital Gains
Assessment Year (AY)
Financial Year (FY)
Cost Inflation Index (CII)

The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained. (~ The Hindu)

Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2009 and redeemed the investment on April 2, 2010 for Rs 1,10,000 

The investment happened in financial year 2008-09, for which the government has declared cost inflation index of 582.

The investor redeemed the investment in financial year in 2010-11, for which the cost inflation index is 711.

The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.

The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.

The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).

Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 711 ÷ 582 i.e. Rs. 122,165. This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 12, 165. This can be set off against long term capital gains, as discussed in the next section.

Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2009-10 and 2010-11. Hence the name “double indexation” for such structures.

Mutual funds tend to come out with fixed maturity plans towards the end of every financial year to help them benefit from such double indexation. 

Largely investors are unaware about this benefit. This benefit can and should be taken by investing towards the end of a financial year, if the investor has surplus funds, because the capital gains virtually becomes tax free due to the double indexation benefit.

How are Mutual Fund Gains Taxed?

Capital Gains Tax, Equity Mutual Funds, Debt Mutual Funds, Indexation Benefits, FMP's, Balanced Mutual Funds.

Capital Gain is the difference between sale price and acquisition cost of the investment. Since mutual funds are exempt from tax, the schemes do not pay a tax on the capital gains they earn.

Investors in mutual fund schemes however need to pay a tax on their capital gains as follows:

Equity-oriented schemes

– Nil – on Long Term Capital Gains (i.e. if investment was held for more than a year) arising out of transactions, where STT has been paid

– 15% plus surcharge plus education cess – on Short Term Capital Gains (i.e. if investment was held for 1 year or less) arising out of transactions, where STT has been paid

– Where STT is not paid, the taxation is similar to debt-oriented schemes

Debt-oriented schemes

– Short Term Capital Gains (i.e. if investment was held for 1 year or less) are added to the income of the investor. Thus, they get taxed as per the tax slabs applicable. An investor whose income is above that prescribed for 20% taxation would end up bearing tax at 30%. Investors in lower tax slabs would bear tax at lower rates. Thus, what is applicable is the marginal rate of tax of the investor.

– In the case of Long Term Capital Gain (i.e. if investment was held for more than 1 year), investor pays tax at the lower of the following:

— 10% plus surcharge plus education cess, without indexation

— 20% plus surcharge plus education cess, with indexation

Indexation means that the cost of acquisition is adjusted upwards to reflect the impact of inflation. The government comes out with an index number for every financial year to facilitate this calculation.

For example, if the investor bought units of a debt-oriented mutual fund scheme at Rs 10 and sold them at Rs 15, after a period of over a year. Assume the government’s inflation index number was 400 for the year in which the units were bought; and 440 for the year in which the units were sold. The investor would need to pay tax on the lower of the following:

— 10%, without indexation viz. 10% X (Rs 15 minus Rs 10) i.e. Rs 0.50 per unit

— 20%, with indexation.

Indexed cost of acquisition is Rs 10 X 440 ÷ 400 i.e. Rs11. The capital gains post indexation is Rs 15 minus Rs 11 i.e. Rs 4 per unit. 20% tax on this would mean a tax of Rs 0.80 per unit.The investor would pay the lower of the two taxes i.e. Rs0.50 per unit.

Here’s how different funds are taxed and who should invest in them:

Debt schemes held for short term: If you fall under 10% tax bracket, growth option would be better—as there is no DDT (13.519%). Dividend option is better if an individual falls under higher income brackets (20% or 30% & above) as the DDT is lower. Debt schemes if held for short term ( less than one year), then capital gains tax will added to income and taxed according to the slab.

Debt funds held for long term: If you want to invest in debt schemes for more than a year, growth option is a better choice. In case of debt schemes, long term capital gains are taxed at 10% without indexation and 20% with indexation.

This article – Guide to debt funds & article – Debt funds can prove beneficial from Economic times further articulates the tax advantages & other benefits of investing in debt funds. 

Source : NISM

 More on Mutual Funds

July 2012

What is form 26AS~Important Tax Statement


What is Form 26AS?

A1Form 26AS is a consolidated tax statement issued under Rule 31 AB of Income Tax Rules to PAN holders. This statement with respect to a financial year will include details of:
a) tax deducted at source (TDS);
b) tax collected at source (TCS); and 
c) advance tax/self assessment tax/regular assessment tax etc. deposited in the bank by the taxpayers (PAN holders). 
Form 26AS will be prepared only with respect to Financial Year 05-06 onwards. [Source : Income Tax India Website]

The information will be useful when filing taxes online.

Tax Filing ~ Which ITR (Income Tax Return) forms to file~File Online

Income Tax India, Tax filing, Online, Form 26AS, ITR forms, Income from salaryNow you can File taxes online using the website : https://incometaxindiaefiling.gov.in/portal/index.jsp. Follow these simple steps for filing online.

1. Register using  your PAN. Once you login you can choose the Assessment Year for filing the tax :

Tax Filing, Which ITR (Income Tax Return) forms to file, Form 26AS, Individual , HUF,

2. Use the following ITR forms based on your type/ source of Income.

Tax Filing, Which ITR (Income Tax Return) forms to file, Form 26AS, Individual , HUF,

3. Download the return preparation excel sheet. There is excel utility excel templates which are provided for each type of ITR forms. 

Income tax return, Excel Utility, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-4

4. Use form 16 to fill in the form (4 pages). Click Validate. This will generate the XML File. Now you just need to upload the file using the following form :

Income tax return, Excel Utility, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-4Income tax return, Excel Utility, XML, Upload return, refund, Preparation software, ITR Return, NSDL, ITR-1 Sahajj, ITR-2, ITR-3, ITR-45.  You will get an email from income tax office. You need to send the signed form to the address mentioned on the file by ordinary post or speed post.

And that’s it… Remember online tax filing is mandatory for Income over 10lacs/Optional for income < 10lacs. You can either sign digitally or send by post.

Ensure that you check Form 26AS for TDS information and verification. 

The document : Common_Mistakes  which should be avoided when filing taxes online. 

Happy Tax filing

July 2010

Why you should never invest in ELSS , Dividend Reinvestment Scheme !

Why you should never invest in ELSS , Dividend Reinvestment Scheme, Section 80C, Mutual Fund Investment, Tax Saving Planning.

Equity Linked Savings Scheme (ELSS) is an instrument which many investors use to get advantage in Section 80C, Rs 1 Lac, deduction in Income.

There is a 3 year lock in in these schemes.

If you choose the Dividend reinvestment Scheme, then the reinvested portion gets locked again for 3 years from the date of dividend.

Even if the schemes declare dividends once every three years , part of your investments can be locked in for ever.


1.  Do not opt for Dividend Reinvestment Scheme in case of ELSS

2. In case you already have invested in such an option in ELSS , then change the option to Dividend Payout. (This is provided you are lucky that the dividend has not yet been declared) (Pls note that Fund House will not allow you to change to Growth)

March 2010

Costly Investment Mistakes to avoid at all Cost – Final Part – IV

Costly Investment mistakes Part 4, Investment Planning, Financial Advise, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience.

You can also cultivate good habits of investing by avoiding the following mistakes.

This series is in continuation to the earlier 3 posts which contains the first 7 common mistakes committed by investors. You can read posts here. (Part I, Part II and Part III)

This post (Part IV) will throw light on the following common 3 mistakes generally committed by investors:

#8. No proper grip on Diversification – If Too little is bad , Too much is no good either

Don’t put your all your eggs in one basket.

There is wisdom is this old saying. Diversification is essentially spreading out investments across different types of asset classes.  (Different kinds of asset classes like Equities, Debt, Gold, and Real Estate etc.)

Even within one asset class – say, equities / mutual funds, portfolio has to be diversified eg: having stocks spread across sectors like Power, Banking, Oil, Telecom sectors, FMCG etc.

Example of over diversification: Having 20 different mutual funds, 50 different stocks and portfolio size is say 5lacs.

Example of under diversification: Having 2 stocks each of 2.5Lacs and both are from Oil sector.

Now, Great investors like Buffet and Munger of Berkshire Hathway, do engage serious money in specific stocks. However, you need to understand that they do intensive research, have access to top management of companies and are into serious investing business.

But for people , looking for investment avenues with the objective – that over a period of time it beats inflation, generates sufficient retirement corpus, provides emotional security, beats the debt instruments by couple of percentage points annualized, which does not provide sleepless nights —- for all such investors,having an optimal diversified portfolio is the way to go.

#9. Not paying attention to Fees, Expenses, Commissions, Taxes involved

If you think education is expensive, try ignorance.

Do you know that themajor earnings source of Mutual fund Providers(Players) are not via entry load (which is now banned by SEBI) , or via exit load (Incidentally these costs are the most advertised). They make their money thru thejuicy AMC charges, which each mutual fund charges you annually. So if you own around 10lacs of mutual fund. You are paying around 25,000/- Rs annually just for holding the units(Assuming highest expense ratios of 2.5% pa). The expenses get factored into the NAV (Net Asset Value) of the Mutual Fund Units. It is intangible and most investors do not feel the pain.

Do you know that over a period of 10 years, or 15 years what kind of negative impact this annual expense ratio business can have on your portfolio? This is over and above the widely known fact that around 80% of the mutual funds worldwide areknown to underperform the Indices. And the fund manager is also subject to performance pressures from the fund house and so has to keep churning his portfolio in order to keep up with the pressure of performing leading to further expense costs. This is one of the reasons I personally do not like mutual funds which do a lot of churning. (You can get the information on portfolio turnover and various expenses of mutual funds from websites like www.valueresearchonline.com or www.mutualfundsindia.com.)

Do you know that ULIP’s (an Investment+Insurance product) carry various expenses which ca be as high as 45 – 60% in the first year. There are umpteen number of charges like (premium allocation charges, mortality charges, admin charges, fund management charges etc, service tax) However the same is never explained by agents.

Do you know the various types of charges associated when you buy/sell shares? There are brokerage charges, service tax, education cess, securities transaction tax (STT), Stamp Duty, Exchange Levy etc.

It makes sense to be aware of these and various other charges involved so that you can make informed choices towards your way to successful investment.

#10. Stop trying to Copy others and Understand your self

Always be a first rate version of yourself instead of a second rate version of somebody else.

Please understand that there is no one-size-fits all solution in the field of investments. Needs and Wants, Risk taking capabilities, vision, emotional quotient, varies from person to person. Many investors make a mistake in simply copying a friend’s (or a relative’s) strategy. Please understand that the strategy might work for him or her. But you need to assess your own situation before jumping into investments and regretting later.

Example: You friend might be doing Futures and Options and Speculation and he might be perfectly all-right with it. He might be having a substantial portfolio base (maybe a good ancestral inheritance) and would be willing to take the additional risk in search for higher returns. However the same strategy of jumping into F&O might not be good for you, if you are basically looking for investments to fulfill your child’s education needs.

Avoid the above common investment mistakes mentioned in this series and become a aware, intelligent and wise investor.

February 2010

Tax Savings – Section 80C – Part II

Tax Planning,minimizing the tax liability, section 80C, 80CCC and 80CCD,ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund),In this part, I will cover the Life Insurance premiums, pension plans on mutual funds and from insurance companies, and various expenses which are also eligible for deductions under 80C.

Life Insurance premiums covered under Section 80C
Premium paid towards life insurance for yourself or your family (spouse and children) is eligible for section 80C tax break. The maximum deduction available is upto a maximum of Rs. 100,000/- under Section 80C. The sum received (including bonus) under life insurance policy (excluding Key man Insurance) is tax free. Please note that Life Insurance needs to be planned properly and should not only be taken for the purpose of Tax savings. (Note that most of the Life Insurance companies come up with innovative , yet inadequate products during the Jan-Feb-Mar period every year to lure investors into schemes which offer inadequate coverage and inadequate returns. They know that people are looking out for avenues). Be-aware.

Types of Life Insurance Policies briefly are :

– Term Policy : This is the undoubtedly the best life insurance scheme which covers only Risk of Death and no survival benefits. This offers maximum coverage for lowest premiums.

– Endowment Policy : This plan accumulates capital over a period of time, returns sum assured + bonus at end of period and covers risk in case of premature death

– Money Back Policy : This plan accumulates capital over a period of time, provides periodic payment during the policy + balance and bonus at the end of period and covers risk in case of premature death

– Whole Life Policy : This plan runs through the life of the policy holder, requiring the payment of premiums throughout the life. There are no survival benefits to the policy holder as he is not entitled. Sum assured + bonus is payable to beneficiaries.

– Annuities : This is an investment that is made ( single lump sum payment or through installments ), in return for a specific sum that is received every year/ 1/2 year or every month, either for life or for a fixed number of years.

– ULIP – Unit linked insurance plans : Unit Linked Insurance Plan – is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire – equity, fixed-return or a mixture of both. Ulips gets covered under life insurance – 80C, and they are popular. However, you should avoid ULIPS as far as possible. I will discuss about this more on my ULIP Awareness post later on.

Pension Plans from Mutual Funds covered under Section 80C

There are two mutual fund pension plans –Templeton India Pension Plan  and UTI Retirement Benefit Pension Plan. Both have a mandatory lock – in period of 3 yrs. And they encourage investors to invest for long term. THese funds are primarily debt oriented mutual funds and offer tax benefit under Section 80C. However these funds have not yet gained popularity among investors. Pls note that unlike traditional pension plans of insurance companies, these mutual funds do not provide pension or annuity.

Regular Pension plans of Insurance Companies covered under section 80C


Pension plans are offered by insurance companies and the contributions, qualifies for tax benefit under section 80CCC instead of section 80C.

Payment of premium for annuity plan of LIC or any other insurer Deduction is available upto a maximum of Rs. 100,000/-. (aggregate deduction under Sec. 80C, 80CCC and 80CCD)